Samsung Q1 21 – Double barrelled.

Semis and smartphones drive results.

• Samsung reported excellent Q1 21 results as mobile devices and semiconductors look like they have underpinned a substantial recovery compared to Q1 20.
• However, as usual, this was already broadly known in the domestic market meaning that the shares barely reacted to the good news.
• Samsung expects Q1 21 revenues / EBIT to be KRW65tn / KRW9.3tn compared to forecasts of KRW65tn / KRW8.9tn representing a 17% YoY growth in revenues and 44% YoY in EBIT.
• Despite the big freeze in Texas which shut down one of Samsung’s fabs, the overall shortage in semiconductors triggered by the pandemic and inventory stocking has kept pricing high.
• This means that Samsung’s other factories will have been running at high capacity and will have also enjoyed robust pricing.
• Hence, I think the potential hit from the month-long shutdown is probably minimal at worst.
• This leaves the way open for a strong performance from both semiconductors and smartphones not to mention the big win Samsung has had with Verizon for 5G infrastructure.
• My friends and colleagues over at Counterpoint Research estimate that Samsung shipped 76m smartphones (up 25% QoQ) and prices also increased by a good margin.
• This is a direct result of the S21 coming in at a lower price than the S20 as well as strong support from the US mobile operators.
• Furthermore, Huawei’s weakening position has allowed Samsung to re-establish its scale advantage which I have long argued is the central pillar of its better than average profitability in Android smartphones.
• This, I suspect is a large part of the better-than-expected numbers.
• However, it is also important not to forget the impact of semiconductors where Samsung is a global leader in memory and storage and also one of two foundries capable of producing leading-edge chips.
• Consequently, with component shortages across the industry and leading market shares in memory and storage, I think that the results from the semiconductor segment will also prove to have been a major driver.
• Hence, I think it is pretty safe to assume that results from TSMC will also show a similar level of strength.
• It is too early to be seriously concerned with regard to the drought in Taiwan as TSMC has enough water until the end of May by which time it usually starts raining.
• Going by the UK example in the mid-1970s, the best way to end a drought is to create a ministerial position to manage the crisis after which one can expect it to start raining within 3 days (see here).
• Samsung’s valuation remains relatively undemanding with good growth over the next few years expected thanks to the strong semiconductor cycle and the demise of Huawei.
• That being said, it is pretty much at an all-time high meaning that there is more upside in the other “Huawei loses” stock, Nokia.
• I own Nokia over Samsung but the argument for selling Samsung for those that hold it is not strong.